At the extended government meeting, Prime Minister Olzhas Bektenov’s statement on the need to raise the Value Added Tax (VAT) rate in Kazakhstan sparked significant discussion. According to the Prime Minister, the current structure of tax burdens prevents the state from fully funding infrastructure and economic projects and creates an imbalance between taxes on labor (wages) and consumption. Below, we examine how an increase in the VAT rate could affect Kazakhstan’s economy and review examples of several countries where the VAT (or a similar sales tax) is higher than in Kazakhstan.
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Initial Context and Core Rationale
Insufficient Economic Growth and the “Development Budget”
Olzhas Bektenov noted that although Kazakhstan shows some positive economic trends, overall growth has not reached the country’s full potential. One reason he cited is the relatively small “development budget”: out of 26 trillion tenge in the republican budget, only 2 trillion tenge is allocated to investment projects that shape future economic growth.
By “development budget,” governments typically refer to spending on infrastructure and industrial programs—such as roads, power lines, heating and water supply networks, and support for development institutions. Without adequate funding in these areas, achieving rapid industrial and technological modernization can be challenging.
Shifting the Tax Burden
The Prime Minister emphasized that most of the current tax burden falls on the wage bill (the payroll). High social contributions, corporate income tax, and mandatory employer pension contributions all increase the cost of goods and services before they even reach the market.
The proposed solution is to reduce social taxes and employer pension contributions and make up for the resulting shortfall in budget revenues by raising the VAT. In this way, a portion of the burden shifts to consumers, while businesses gain the opportunity to lower production costs, thus boosting their competitiveness at home and abroad.
Why VAT Specifically?
Value Added Tax is one of the main sources of budget revenue in many countries. In Kazakhstan, the VAT rate currently stands at 12%, which is relatively low by global standards. The main arguments in favor of increasing VAT include:
- Broad Tax Base. Unlike personal income taxes or social contributions, VAT is paid by nearly all participants in the economic chain—from manufacturers to the end consumer.
- Transparency for Businesses. The mechanism for VAT refunds is well-regulated, and the tax portion is clearly reflected on invoices and in the final price.
- Consumption-Based Fairness. The more goods and services a person consumes, the more VAT they pay. This is especially relevant for luxury goods and services, which carry a higher tax share for wealthier consumers.
However, raising the VAT rate requires a careful approach to avoid undesirable side effects such as higher inflation, weaker consumer demand, and an expansion of the shadow economy.
International Experience: Countries with Higher VAT
To understand the potential impact of a VAT hike on the economy, it is useful to examine the experiences of other countries. Many developed nations have VAT or an equivalent sales tax significantly higher than Kazakhstan’s 12%.
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European Union Countries
Hungary. One of the highest VAT rates in Europe at 27%. Reduced rates apply to certain categories (food, medicine, etc.). Although a high VAT significantly bolsters the national budget, critics often note the heavier burden on consumers.
Denmark and Sweden. Both Scandinavian countries maintain a VAT rate (moms) of 25%. The Nordics are known for their comprehensive social guarantees and advanced healthcare and education systems, which are largely funded through high taxation, including VAT.
France. The standard VAT rate is 20%, with reduced rates (5.5% and 10%) for specific items such as essential foods and certain services.
EU countries often combine high standard VAT rates with reduced rates for essential goods. This approach helps lower the cost for vulnerable groups and promote consumption of basic necessities.
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United Kingdom
Despite leaving the European Union, the UK still operates a VAT system with a standard rate of 20%. Certain goods such as essential food items, children’s products, and books are subject to a zero-rate VAT to lessen the overall tax burden on consumers.
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China
In China, VAT typically ranged between 13% and 16% depending on the product category, though the country has been implementing large-scale tax reforms to stimulate the economy. China’s experience underscores how raising or lowering VAT involves balancing consumption, export competitiveness, and government revenue.
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Japan
Japan has a consumption tax similar to VAT, which was raised from 8% to 10% in 2019. This move sparked concerns about reduced consumer spending and rising inflation, but was deemed necessary by the government to fund social support programs for an aging population.
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Russia
In Russia, the VAT rate stood at 18% for a long time but was increased to 20% on January 1, 2019. The government cited the need for additional funding of national projects and the social sector. While this led to price increases and some decline in consumer demand, it also boosted budget revenues, enabling more extensive infrastructure and social programs.
Potential Consequences for Kazakhstan
Taking into account global experience and the country’s current economic climate, an increase in VAT could have multidimensional effects on Kazakhstan’s economy.
Positive Outcomes
Rise in Budget Revenues. A higher VAT rate could substantially increase government income, allowing greater spending on infrastructure, energy, water management, gas transmission, and other vital fields that require significant investment.
Reduced Tax Burden on Payroll. Shifting part of the burden from payroll taxes to consumption could enhance the competitiveness of Kazakhstani businesses. In the long term, this might create more jobs and boost exports.
Greater Transparency and Digitalization. When VAT becomes a key revenue source, governments are motivated to step up measures against “gray” schemes and improve digital administration services. This can accelerate the digitalization of business processes and make tax payments more transparent.
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Risks and Challenges
Inflationary Pressure. A higher VAT rate will likely increase final prices, potentially driving inflation upwards. On the other hand, if labor-related taxes truly decrease, part of the added cost could be offset by lower production expenses.
Lower Consumer Demand. With limited disposable income, a heavier tax burden might temporarily reduce household spending, negatively affecting small and medium enterprises that rely on the domestic market.
Growth of the Shadow Economy. A sharp or significant tax hike could prompt some businesses to move transactions off the books to avoid paying higher taxes, negating part of the potential revenue gain.
Need for Differentiated Rates. As seen in European countries, a single high rate often requires lowered or zero rates for socially essential goods and services.
Key Conditions for Successful Implementation
For a VAT hike to truly foster economic development without destabilizing the economy, the Kazakhstani government must introduce a comprehensive package of measures:
Simultaneous Reduction in Social Contributions. Legislation must clearly and transparently reduce payroll taxes and mandatory pension contributions, so businesses feel a genuine easing of their tax burden.
Gradual Increase. Sudden large jumps in tax rates can spark rapid price hikes and social unrest. Phasing in higher VAT rates with clear timelines and thresholds allows both businesses and consumers to adapt more smoothly.
Targeted Support for Vulnerable Groups. To mitigate the negative impact on low-income households, the government can implement measures such as reduced VAT on essential goods and direct social assistance.
Enhanced Measures Against the Shadow Economy. Digitalizing and automating tax administration, closely tracking supply chains, and promoting electronic documentation can reduce opportunities for tax evasion.
Open Dialogue with the Business Community. Any major tax reform demands thorough communication. Entrepreneurs and the public should be informed in advance about transition mechanisms, reduced rates, and potential benefits.
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Conclusion and Outlook
A decision to raise the VAT rate is never simple and often sparks vigorous debate. Kazakhstan aims to accelerate economic growth, develop infrastructure, and boost the competitiveness of its businesses—goals that could potentially be aided by such a measure if coupled with well-designed supporting policies.
Countries such as Hungary (27%), Russia (20%), and Denmark and Sweden (25%) show that high VAT rates can coexist with stable economies and strong social protections, provided the resulting government revenues are effectively invested and accompanied by thorough social support measures. However, any such tax increase must be approached cautiously to balance inflationary risks and potential dips in consumption against the broader goals of social and economic development.
For Kazakhstan, the critical factor is not merely raising VAT but undertaking a strategic overhaul of the fiscal system: lowering the burden on salaries and shifting part of it to consumption should go hand in hand with incentives to spur industrial growth and modernize key sectors. If properly orchestrated, this step could increase the development budget and give businesses a competitive edge. Yet any abrupt or poorly executed move risks undermining the confidence of entrepreneurs and the public, potentially fueling inflationary pressure.
Key Takeaway
Raising the VAT rate can serve as a powerful catalyst for the economy if implemented transparently, methodically, and in tandem with other reforms. The government must put considerable effort into clarifying and planning such a change to ensure long-term and sustainable gains for Kazakhstan’s economy and society.
